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Sunday December 3rd, 2023

Sri Lanka state salary bill down to 55-pct of taxes in early 2023

ECONOMYNEXT – Sri Lanka state salary bill as a share of taxes has fallen to 55 percent of taxes in the first four months of 2023, from 72 percent last year, official data shows.

Sri Lanka collected taxes of 742.5 billion rupees up to April 2023 and the salary and wage bill was 303.3 billion rupees. Pensions were a further 105.9 billion rupees.

“Expenditure on salaries and wages of public servants decreased by 4.0 percent due to the retirement of large number of public servants at the end of 2022 while due to the same reason, expenditure on pension payment increased by 6.3 percent,” the finance ministry said in a report.

Sri Lanka’s state salary bill started to go up steeply from 2015 under so-called ‘revenue based fiscal consolidation’ where ‘spending based consolidation’ (cost-cutting) was abandoned.

As a result, while tax collections went up, spending also went up from around 17 percent of GDP to around 20 percent of GDP and deficits were not controlled.

A key cost item is also the interest bill. Sri Lanka has high interest rates due to monetary instability coming from output gap targeting and flexible monetary policy.

Sri Lanka from 2015 also started to target an output gap by printing money after the IMF taught the trigger happy agency to calculate potential output, blowing the balance of payments apart. Stabilization measures were imposed triggering higher interest rates and growth shocks.

In 2020 extreme ‘macro-economic policy’ was deployed adding tax cuts to money printing (rate cuts with inflationary open market operations).

Strict spending based consolidation has been operated in the last two years under President Ranil Wickremesinghe and Treasury Secretary Mahinda Siriwardana in addition to tax increases (revenue based fiscal consolidation).

A part of the correction is coming from inflation and currency depreciation, and nominal salaries will eventually go up. To have lasting corrections Sri Lanka’s state has to be be allowed to trim down, including the military, analysts say.

One of the assumptions behind the ‘revenue based fiscal consolidation’, a cookie cutter solution advocated by the International Monetary Fund, is that spending around 20 percent is perfectly fine for a ‘developing country’ and no effort is made to cut costs.

Classical economists had pointed out that in a democracy, revenue based fiscal consolidation is a nonsensical concept.

“Past experience in Ceylon, which is in line with experience in virtually all parts of the world, is that in a democratic set up political and other pressures are heavily on the side of more and more spending by the government,” economist B R Shenoy told Sri Lanka in a report commissioned by ex-President J R Jayewardene in 1966 when revenue was already above 20 percent of GDP.

“When Revenues increase, under the weight of these pressures, expenditures too increase to meet, or
even exceed, revenue collections.

“In Ceylon during the past seven years revenues rose by 45 per cent and Expenditures charged to Revenues by 48 per cent.

“There is a real danger that any programme for increased Revenue collections may be attended by a corresponding increase in the consumption expenditures of the government, and little may be left of the additional revenues to cover Budget deficits.”

Sri Lanka’s was was taking 20 percent of revenue, undermining private savings and investment, which was much higher than Germany (13.7-pct) and Japan which 13.9-pct at the time, Shenoy pointed out.

At the time also Sri Lanka was beset with forex shortages and import controls/import substitution due to central bank money printing to suppress rates.

Shenoy advocated a single anchor monetary regime (a floating rate) saying devaluations of soft-pegs were hit or miss, in an unusually advanced remedy before developed nations floated in 1971.

In 2023 Sri Lanka legalized another dual anchor conflicting regime called a ‘flexible exchange rate’ which is neither clean float nor a hard peg. As a lasting solution to the country’s monetary problems analysts have advocated taking away the central bank’s powers to deploy macroeconomic policy. (Colombo/Sept21/2023)

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UAE investors express interest in Sri Lanka’s energy, tourism, ports, real estate: Ali Sabry

ECONOMYNEXT – A group of investors based in the United Arab Emirates have expressed their interest in renewable energy, tourism, ports, and real estates, Foreign Minister Ali Sabry told Economy Next.

A Sri Lankan delegation led by President Ranil Wickremesinghe is in Dubai to take part in the 2023 United Nations Climate Change Conference (COP28).

Sabry said a group of large investors met the President on Friday and discussed possible opportunities in Sri Lanka.

“We met big investors here particularly on renewable energy, tourism, port development and also infrastructure development and real estate. That’s where they are doing very well,” Foreign Minister told Economy Next.

“Our embassy will organize a higher-level business delegation to visit Sri Lanka to look at the available opportunities.”

“There is a lot of traction and interest in Sri Lanka.”

Sri Lanka has been exploring to attract investors to crisis hit Sri Lanka which declared bankruptcy in April last year with sovereign debt default.

Since then, most investors have taken a step back from investing in the island nation due to its inability to serve debts and uncertainty over such investments.

Several government officials said investors may start pouring dollars into Sri Lanka very carefully after they see some certainty of debt repayments. (Dubai/Dec 3/2023)

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Sri Lanka to push for green initiative investment “after OCC finalizing” debt deals – President

ECONOMYNEXT – Sri Lanka will push for investment into green initiatives globally after the Official Creditor Committee (OCC) finalizing on the island nation’s debt restructuring, President Ranil Wickremesinghe told Economy Next at the 2023 United Nations Climate Change Conference (COP28).

President Wickremesinghe along with local and global advisors has inaugurated three ambitious projects to convert climate change-led disaster funding, which is mostly seen as donations, into viable commercial enterprises involving private sector investments.

The idea is to rally all the global nations in the Tropical Belt threatened by disasters related to climate change and bargain collectively with advanced economies which emit more greenhouse gases into the environment resulting in global warming for more green initiatives like renewable energy projects.

Wickremesinghe initiated a Climate Justice Forum (CJF), Tropical Belt Initiative (TBI), and called on the world to help establish the International Climate Change University in Sri Lanka.

His moves have been welcomed by global leaders, though analysts said an initiative like TBI is a “bold and imaginary” step.

“This is the first step. We have now put forward the proposal,” Wickremesinghe told Economy Next on Sunday on the sideline of the COP28 in Dubai’s EXPO 2020.

“There is an interest. We have to wait for OCC finalizing (debt restructuring) before pushing for investments.”


Global investors are hesitant to invest in Sri Lanka due to its bankruptcy and sovereign debt default.

Sri Lanka is still recovering from an unprecedented economic crisis which has compelled the island nation to declare bankruptcy with sovereign debt default.

President Wickremesinhe during a forum on Saturday said his initiatives would help government in advanced countries not to use tax money of its own people for climate related disasters in other countries and instead, private sector investors could help by investing in renewable energy initiatives.

President Wickremesinghe’s government has been in the process of implementing some tough policies it committed to the International Monetary Fund (IMF) to stabilize the country and ensure sustainability in its borrowing.

Sri Lanka is yet to finalize the debt restructuring fully as it still has to negotiate on repayment schedule of commercial and sovereign bond borrowing.

The OCC and Sri Lanka had agreed on the main parameters of a debt treatment consistent with those of the Extended Fund Facility (EFF) arrangement between Sri Lanka and the IMF.

The members of the Paris Club which are part of the Official Creditor Committee are representatives of countries with eligible claims on Sri Lanka: Australia, Austria, Belgium, Canada, Denmark, France, Germany, Japan, Korea, the Netherlands, Russia, Spain, Sweden, the United Kingdom, the United States of America.

The OCC has said it was expecting other bilateral creditors to consent to sharing, in a transparent manner, the information necessary for the OCC to evaluate comparability of treatment regarding their own bilateral agreement.

The OCC also has said it expects that the Sri Lankan authorities will continue to engage with their private creditors to find as soon as possible an agreement on terms at least as favourable as the terms offered by the OCC. (DUBAI/Dec 3/2023)

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Sri Lanka alcohol regulations may be spurring moonshine: Minister

ECONOMYNEXT – Sri Lanka’s alcohol regulations may be reducing access to legal products and driving illegal moonshine sector, State Minister for Finance Ranjith Siyambalapitiya said amid plans to change opening times of retail outlets.

Sri Lanka is currently discussing changing the opening times of bars (retail alcohol outlets), he said.

Sri Lanka’s excise laws may be contributing to the growth of illegal products, Minister Siyambalapitiya was quoted as saying at the annual meeting of Sri Lanka’s excise officers.

Over 20 years legal alcohol sales have grown 50 percent but illegal products are estimated to have grown 500 percent, he said.

It is not clear where the 500 percent estimate came from.

In Kandy there was a bar for every 6,000 persons but in Mullativu there was one for only 990,000 persons and people had to travel 80 kilometres to get to a legal outlet, Minister Siyambalapitiya had said.

However Sri Lanka has a widespread moonshine or ‘kasippu’ industry driven by high taxes on legal products.

The widely used ‘gal’ or special arrack is now around 3,500 rupees and may go up further with a hike in value added tax. About 2000 rupees of the sale price is taxes.

After a currency collapse and tax hikes legal alcohol sales have fallen, leading to local sugar companies burying ethanol, according to statements made in parliament.

An uneven distribution of bars may also be driving people towards alcohol.

Alcohol sales is controlled on the grounds that it is an addictive product which can lead to poverty, ill-health, bad behaviour and criminal activities, though advocates of high taxes ignore the poverty angle.

High taxes are promoted by temperance movements some of whom have called for outright prohibition in the last century.

Temperance movements spread among evangelical groups in the West and were also embraced by nationalists/moralists and independence movements in colonial authorities.

Prohibition in the US however led to more criminal activity as an organized crime took to bootlegging. (Colombo/Dec03/2023)

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